Default Data on Parent PLUS Loans

By

The national default rate for Parent PLUS loans has nearly tripled in recent years, but it remains well below the default rates for other federal student loans, according to data released for the first time last week by the U.S. Department of Education.

Of all parent borrowers whose PLUS loans entered repayment in the 2010 fiscal year, the data show, 5.1 percent were in default three years later. That figure has risen steadily from the 1.8 percent default rate for the cohort of borrowers in the 2006 fiscal year.

Breaking down the 2010 figure by type of institution, for-profit colleges had the highest default rate, at 13.3 percent, compared with 3.4 percent and 3.1 percent, respectively, at private nonprofit and public institutions. The data do not distinguish between two- and four-year institutions or types of degree.

The release of new information about the performance of PLUS loans comes as the department is considering changes to the eligibility criteria for such loans. In 2011, the Education Department touched off a wave of controversy when it tightened the standards for those loans, which led to large numbers of students and their families being denied PLUS loans.

The new data confirm that the department’s changes to the PLUS loan credit check, which involved taking a more expansive look at a prospective borrower’s credit history, fueled those loan rejections. In the past two years, the reason for the majority of PLUS loan rejections has been that a borrower either has an account in collection or has had a recent charge-off. Before the department starting including those measures, prospective borrowers were most frequently rejected for having an account that is greater than 90 days delinquent.

Under pressure from the presidents of historically black colleges and universities, who said their students were disproportionately affected by the changes, the department said it would reconsider loan applications on an individual basis.

Many presidents of black colleges and several members of Congress have said that the appeals process is insufficient and have called on the Education Department to roll back the 2011 changes and loosen the eligibility criteria for Parent PLUS loans. Just last week, the UNCF issued a report calling the PLUS loan problem a “crisis” that is limiting students’ access to higher education.

Some consumer advocates and think tanks, meanwhile, are pushing the department to keep the credit standards -- or even tighten them further -- so that parents aren’t saddled with large amounts of debt that they cannot possibly repay.

The Education Department has not indicated what types of credit standards it wants to include into the new PLUS loan rules that a rule-making panel is considering this spring.

But David H. Swinton, the president of Benedict College, said that the default rate data vindicate the position of black college leaders who are seeking the looser PLUS loan standards.

“From my point of view, the data made it clear that there is no need to tighten any criteria,” said Swinton, who is also representing minority-serving institutions on the department’s negotiating panel. “It makes clear that there is no significant default problem with the PLUS loan program.”

The most recent Parent PLUS default rates released by the department are lower than the default rates on other federal student loans -- a figure the department releases annually. The national three-year default rate for the 2010 fiscal year was 14.7 percent. The Parent PLUS loan rate for the same period of time was 5.1 percent.

Swinton said that the 2011 changes to the PLUS loan program had “a major impact” on his campus, with an initial 75-percent reduction in approvals. While that decline improved somewhat through the department’s appeals process, he said, it still led to overall enrollment drops at his institution in the past two years.

The goal of the Parent PLUS loan program, Swinton said, is to provide access and freedom of choice to students. He added that it was “patronizing” for people to suggest that families seeking those loans cannot judge for themselves whether it’s appropriate to take on such debt.

Advocates of tighter eligibility requirements for PLUS loans, on the other hand, say there are real problems with the program that need to be addressed.

“We absolutely should be concerned about defaults in the PLUS loan program,” said Rachel Fishman, a policy analyst at the New America Foundation who has criticized institutions for using PLUS loans to mask their prices and skirt accountability measures.

Because PLUS loans are subject to some credit screening, Fishman said, it makes sense that the entire pool of PLUS loan borrowers might perform better than those of other federal college loan programs that are open to everyone regardless of credit history.

Fishman said the federal government needs to be more careful about which families it allows to take on Parent PLUS loan debt, particularly since the loans are so difficult to discharge in bankruptcy, do not qualify for income-based repayment (unlike most other federal loans for college), and can trigger garnishment of Social Security checks.

Another problem, Fishman said, is that the PLUS default rates at any individual college may be egregiously high without any consequences for that institution. Unlike the default rates on other federal student loans, the Education Department does not publish campus-level PLUS loan default rates or punish colleges where large numbers of PLUS loan borrowers default.

The data released last week by the department break down PLUS loan defaults only by three types of institutions: for-profit, private nonprofit, and public. But the department has said that institution-level information is not available for PLUS loans.

The department does not publish such information about PLUS loans because there is no process for institutions to review or appeal that data, a department official said Monday. The department feels relatively confident about the sector-by-sector analysis it produced last week, though, because the errors in the PLUS loan default data at any one institution are likely to be canceled out, from a statistical standpoint, by errors in the data at another institution, the official said.

Further, the official added, the department is in ongoing discussions about whether it should provide such information in the future, even if it is not mandated by Congress.

The rule-making panel on PLUS loans, as well as on other financial aid “program integrity” issues, will resume its third set of negotiations later this month.